The rulers of the United Arab Emirates city-state of Dubai have for months breezily dismissed concerns about Dubai World, the government's main holding company for investments and real estate developments. "We are not worried," said Dubai's Emir, Sheik Mohammad bin Rashid al-Maktoum, at a press conference two months ago, despite the fact that Dubai has debts that are at least 100% of GDP  and may be closer to 125%. When critics later complained that Dubai had no realistic plans for paying off its debts, al-Maktoum told them to "shut up." But on Thursday, as Dubai's government announced it was seeking a halt to its debt repayments ahead of a $4 billion bill due on Dec 14, spin was at a minimum. So many worried investors tried to join a conference call for bond holders of Nakheel, a property company owned by Dubai World, the lines collapsed.

The Dubai debacle triggered immediate concern about a new wave of financial problems rippling through global markets. Stock-market indexes plummeted, the cost of insuring against a default by Dubai jumped and the dollar strengthened as investors rushed back into greenbacks. On Friday afternoon, stock markets made something of a recovery as analysts took a second look at what Dubai's proposed repayment halt means. Eighty billion dollars  Dubai's total liabilities  may sound like a lot of money but in the context of the past year, it's not huge. And while banks like HSBC and Barclays have billions in exposure to Dubai, they are also better capitalized than they were a year ago, and thus more able to withstand hits of this size. (See the top 10 bankruptcies.)

Dubai's problems stem from its huge  and hubristic  ambition. The Gulf emirate, which unlike the other emirates that join to form the U.A.E., has little oil or gas, and so has concentrated on building itself up as a vibrant business and transport hub and the home to some of the world's biggest, flashiest and most modern real estate. To lure in the masses, Dubai promoted itself as an income tax free resort for the world's rich and upper middle class. Dubai's master planners developed a signature over-the-top style geared to the tastes of newly minted wealth  an indoor ski slope, a luxury condominium development with man-made islands arranged in the shape of a huge palm tree, and the tallest building anywhere.

But when world markets collapsed last year, so did Dubai's real estate market, leaving developers like Nakheel struggling to finish projects and pay suppliers. Speculators fled, and thousands of expatriates and locals who had bought into the dream were left owning unfinished condos or houses they could not sell. Residential real estate prices have fallen by almost half in the past year, the deepest decline anywhere in the world. (Read: "How Wall Street's Bust Threatens Dubai's Boom.")

In February, oil-rich Abu Dhabi, home to the U.A.E.'s rulers, stepped in with $10 billion to prop up its ailing neighbor. Abu Dhabi could step in again, though next time it will probably demand a greater say in the way Dubai Inc. operates. (Read: "Abu Dhabi: An Oil Giant Dreams Green.")

Since the global financial crisis hit, the more sober Gulf economies have fared relatively well. Not only is the Middle East less integrated into global financial market than other regions, but oil prices have risen again since their initial decline last year. Unlike Dubai, the oil economies of the Middle East have been more sober during the boom years, putting their money in massive infrastructure projects, building cultural institutions, and keeping big piles of cash on hand for a rainy day. Dubai may want to do the same.